Seven considerations when investing your retirement savings in shares
Shares make good long-term investments, and this is no different when it comes to retirement savings – perhaps the ultimate form of long-term investment. Knowing how much to save and understanding some basic investment principles will put you in an excellent position to achieve your retirement savings goals.
Here are seven pointers to bear in mind when saving for retirement by investing directly in shares.
1. Be clear about your goal
When working and saving, the goal of your retirement portfolio should be to earn the highest possible rate of return while not taking so much risk that it scares you into pulling out of the market during a downturn.
Once retired, your goal changes. A different goal means a different portfolio. A retirement portfolio needs to produce reliable cash flows that last the rest of your life – regardless of how markets perform over your retirement years.
2. Understand what you’ll need to retire comfortably
A crucial step in the process is calculating how much you'll need to retire comfortably, and then working out how much to save each year to get there. No matter how smart your retirement portfolio is, you won’t reach your goals if you simply aren't saving enough.
3. Know your ideal asset allocation
Stocks can be quite volatile in the short term, but also tend to produce the best returns over long periods. This makes them best suited for investors who have sufficient time to ride out the ups and downs of the market, and also make them a non-negotiable portfolio component for most long-term investors. There's no one-size-fits-all rule for asset allocation. An investor who received a big inheritance and already has enough money to retire could potentially afford to take a little more risk than other investors, for example. Alternatively, they could also afford to leave more money in cash since growth isn't as much of a concern. The ‘right’ decision will depend on their personal circumstances and risk tolerance.
4. Adjust your share portfolio as needed
Once you've set up your investment allocations to include a diversified portfolio of investments, it's important to evaluate your portfolio periodically. You should consider reviewing your asset allocation at least every five years, and you could do it more frequently when you get closer to retirement. Rebalance your existing investments regularly to maintain the risk and return characteristics of your portfolio. This may need to happen as often as quarterly.
5. Transition planning
You will need to transition from accumulation mode to your retirement asset allocation plan before your retirement date to ensure sufficient liquidity is available when needed. While retired investors may still have a long investment period ahead of them, you will need to decide on a strategy for drawing an income from your portfolio.
Remember that ten years before you retire, you still have a fairly long time horizon ahead. While there is never a guarantee, the odds are in your favour that a sizable exposure to equities will pay off.
As you approach retirement, however, you will probably want to scale back to your preferred retirement asset allocation. Exactly how you manage the transition from stocks to a balanced portfolio is up to you. Too early and you are likely to miss out on some growth, too late and you may be exposed to a market downturn at or near your retirement.
6. Withdrawal plans
If you have some leeway in terms of your income requirements, or your capital base is sufficient, making fixed annual percentage withdrawals against the portfolio value, rather than rand amount withdrawals, may be an acceptable solution for many retirees. This method will provide a variable income stream that is automatically adjusted for investment results.
7. And lastly… consider the bigger picture
Retirement planning cannot take place in a vacuum. It needs to consider your family situation and objectives. An experienced financial planner can help you gain the insights, and maintain the discipline you need to ensure a successful retirement outcome.